PROGRESS  OR  PARALYSIS 


FOR  1920 


Address  of 

MR.  SAMUEL  REA 


President,  The  Pennsylvania  Railroad  System 


Delivered  before  the 

DETROIT  REAL  ESTATE  BOARD 
Detroit,  Mich.,  January  15th,  1920 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/progressorparalyOOreas 


PROGRESS  OR  PARALYSIS  FOR  1920 


ADDRESS  OF 

MR.  SAMUEL  REA 
PRESIDENT,  THE  PENNSYLVANIA 
RAILROAD  SYSTEM 
BEFORE  THE 

DETROIT  REAL  ESTATE  BOARD 

DETROIT,  JANUARY  15,  1920 

It  gave  me  pleasure  to  accept  your  invitation 
to  briefly  discuss  with  you  matters  of  mutual 
interest. 

On  the  threshold  of  a new  year,  the  first  duty 
of  every  American  citizen  is  to  decide  where  he 
stands  himself,  and  where  he  wants  this  Nation 
to  stand.  We  cannot  have  progress  and  pros- 
perity without  an  honest  standard,  in  which  in- 
dividual or  class  selfishness  must  he  held  in  check, 
so  that  public  welfare  shall  predominate.  In  the 
words  of  Washington,  “let  us  raise  a standard  to 
which  the  wise  and  honest  may  repair.”  The 
standard  for  owners,  workers  and  management 
must  be  for  liberty  under  law  and  order,  for  in- 
creased production,  for  an  honest  day’s  work  and 
high  wages,  increased  savings  and  satisfied  lives. 

Among  the  home  problems  that  should  be 
promptly  solved  is  that  of  ample  railroad  facil- 
ities, and  adequate  and  sound  railroad  credit. 


Both  of  them  have  been  stifled  and  starved 
for  many  years.  The  results  are  increased  costs, 
congestion,  and  restriction  of  your  business.  It 
is  time  to  promptly  remedy  this  situation,  not 
because  the  railroads’  managements  or  owners 
desire  that  solution,  but  because  the  rail- 
roads exist  solely  for  public  service  and  de- 
pend solely  upon  the  daily  public  service  they 
perform.  They  give  employment  to  large  num- 
bers and  are  the  largest  consumers  of  supplies 
which  make  them  invaluable  and  regular  con- 
tributors to  our  individual  and  national  pros- 
perity; they  are  owned  by  our  citizens  and  their 
institutions,  and  they  are  one  of  the  chief  means 
of  support  to  the  Governments — Federal,  State 
and  Municipal — through  the  quarter  of  a billion 
or  more  of  annual  taxes  they  pay.  The  greater 
number  of  our  institutions  and  private  citizens 
who  provided  the  moneys  for  their  construction 
are  not  rich,  and  depend  upon  fair  returns  on 
their  railroad  investment  as  one  of  the  means 
of  living.  If  that  return  is  too  low,  or  is  cut 
off,  or  the  authorities  are  unfair  in  legislation 
or  regulation,  the  new  capital  cannot  be  obtained 
for  railroad  betterment  and  new  construction. 

March  1st  is  the  date  fixed  for  the  return  of  the 
railroads.  The  public  accommodation  will  be  our 
uppermost  thought,  but  the  public  cannot  expect 
that  by  then  the  roads  will  be  working  smoothly, 
nor  that  all  of  the  si^ecial  conditions  essential  for 

(2) 


War  and  Governmental  purposes,  will  be  adjusted 
to  meet  all  of  their  expectations.  That  will  come 
gradually  from  skilled  supervision,  and  from  the 
termination  of  artificial  War  conditions  and  the 
settlement  of  unrest  that  affects  the  Country  at 
large.  The  release  of  the  railroads  from  Federal 
Control  is  desirable,  but  their  abandonment  by  the 
Government  without  proper  business  and  legis- 
lative precautions  would  be  a calamity,  especially 
as  their  revenues  have  not  been  adjusted  to  pres- 
ent costs. 

The  immediate  railroad  essentials — and  they 
are  equally  important  to  business  and  finance — 
are  these: 

1.  Adequate  rates  to  be  at  all  times  maintained 
to  prevent  the  railroads  from  again  getting  into 
the  weak  position  from  which  they  are  now  trying 
to  emerge.  For  this  purpose  the  adoption  of  a 
rate-making  rule,  or,  if  that  is  not  acceptable,  the 
fixing  of  some  minimum  return  is  essential  for 
the  positive  guidance  of  the  Commissions  which 
regulate  rates,  and  it  should  be  on  a fair  average 
basis  of  return  throughout  a series  of  years. 

2.  Fund  the  War  indebtedness  to  the  Govern- 
ment, which  chiefly  consists  of  expenditures  made 
by  the  Government  for  additions  and  betterments 
essential  to  carry  the  traffic  of  the  War  period 
and  protect  the  life  of  the  Nation;  and  also  re- 
turn the  roads  with  sufficient  working  capital  to 

(3) 


resume  operations.  The  Government  found  it 
essential  to  have  working  capital,  and  the  rail- 
roads were  called  upon  to  provide  a large  part 
of  that  working  capital,  at  the  beginning  of  Fed- 
eral Control,  both  in  money  and  materials  and 
supplies. 

3.  Continue  the  standard  compensation  as  pre- 
scribed by  the  Federal  Control  Act  and  Contract 
for  at  least  six  months,  until  the  railroad  situa- 
tion has  been  steadied  by  adequate  rates  and 
stronger  credit.. 

4.  Provide  sufficient  capital  to  finish  additions, 
betterments,  and  equipment  already  authorized  by 
the  United  States  Railroad  Administration,  as  well 
as  to  finance  additional  new  work  and  equipment 
that  should  be  authorized  in  1920,  and  enable 
the  railroads  to  provide  for  securities  maturing 
in  that  year. 

The  Government  is  not  asked  to  make  a gift  to 
the  railroads  by  such  funding  of  past  expendi- 
tures or  for  such  new  capital,  but  to  advance  the 
same  and  bridge  over  this  difficult  financial 
period,  receiving  from  the  railroads  the  best  se- 
curities they  can  offer  to  evidence  such  debts,  and 
require  their  payment  in  say  ten  years,  with  suit- 
able interest.  The  public  interest  should  be  pro- 
tected in  this  way,  otherwise  because  of  financial 
conditions  new  equipment  and  facilities  cannot 
be  provided  in  1920. 


(4) 


It  is  our  hope  that  the  Conferees  of  the  Senate 
and  House  of  Representatives  will  take  a suffi- 
ciently comprehensive  view  of  the  situation  as 
to  deal  adequately  with  the  entire  railroad  sit- 
uation. We  must  jn’event  restriction  of  business 
from  inadequate  railroad  facilities  to  accommo- 
date the  expanding  business  of  this  Country,  we 
must  see  that  labor  will  be  justly  dealt  with, 
and  the  investors  may  have  the  basis  upon  which, 
by  vigilant  management  and  efficient  operation, 
a proper  return  can  be  paid  on  the  existing 
railroad  investment  and  a fair  margin  earned 
to  induce  the  new  capital  to  invest  in  the  roads. 
If  the  legislation  is  not  of  this  character  then 
we  will  have  stagnated  railroad  systems,  which 
will  cripple  industrial  enterprise,  curtail  pro- 
duction, increase  transportation  costs  and  may 
ultimately  compel  Government  ownership  and 
operation. 

Notwithstanding  the  difficulties  with  which  the 
railroads  have  had  to  contend,  they  would  not, 
in  my  judgment,  be  of  moment  today  if  the  rail- 
roads had  received  in  the  past  ten  years  rates 
at  all  commensurate  for  the  service  rendered,  or 
reasonably  compensatory  with  the  investment. 
That  service  was  not  only  the  cheapest,  but  con- 
sidered the  best  transportation  anywhere.  Fair 
wages  were  paid  and  their  prosperity  was  shared 
with  the  employes,  and  the  Governments  received 
increased  taxes.  Nevertheless,  the  position  of  the 

(5) 


railroad,  investor  was  slowly  but  surely  becoming- 
weaker,  not  only  through  the  reduction  or  pass- 
ing of  dividends,  but  through  the  loss  in  the 
purchasing  power  of  his  income.  While  our 
regulating  authorities  may  have  had  all  the  good 
intentions  in  the  World,  the  net  operating  income, 
taken  as  a whole,  was  smaller  than  demanded  in 
the  public  interest  and  entirely  inadequate  as  a 
credit  basis.  The  Interstate  Commerce  Commis- 
sion, in  its  notable  decision  in  the  5%  Eastern  Rate 
Case  of  July,  1914,  expressed  this  view  when  the 
return  on  property  investment  in  the  Official 
Classification  Territory,  which  embraces  these 
Eastern  Railroads,  for  the  preceding  year  was  only 
5.36%.  Yet,  taking  the  railroads  as  a whole,  the 
property  investment  returns  since  1910  did  not 
reach  that  figure  again  until  the  increased  War 
traffic  of  1916,  prior  to  the  overdue  adjustment  of 
wages  and  other  costs  arising  from  the  War. 

The  compensation  to  be  paid  during  Federal 
Control  was  equal  to  a return  on  property  invest- 
ment of  all  the  railroads  of  the  Country  of  5.22%. 
But  the  net  operating  return  for  1919  on  the  prop- 
erty investment  may  probably  be  equal  to  about 
3%,  due  to  non-restoration  of  the  equilibrium 
between  income  and  expenses.  None  of  these  re- 
turns are  adequate  in  the  public  interest,  or  as  a 
basis  for  credit,  and  no  matter  what  kind  of  leg- 
islation is  enacted,  if  the  National  regulatory 
body  is  not  going  to  change  this  condition,  there 


(6) 


is  no  escape  from  inadequate  railroad  facilities, 
poor  service  and  restricted  investment.  I am 
hopeful,  however,  that  the  viewpoint  of  the  whole 
Country  has  been  widened  as  to  the  dangers  of 
this  situation,  and  that  the  fear  of  having  some  few 
strong  and  prosperous  roads  will  not  prevent  jus- 
tice being  done  to  all  of  them.  We  are  told  that 
if  this  situation  is  equitably  dealt  with  by  ade- 
quate rates  the  strong  railroads  will  get  too  much, 
and  the  weak  railroads  not  enough.  Have  we  a 
dozen  strong  railroad  systems  now?  I doubt  it. 
Look  at  the  period  upon  which  the  Government 
based  the  compensation  to  the  railroads,  the  three 
years  ending  June  30th,  1917,  one  of  the  best  in 
the  history  of  these  railroads,  about  eighteen  sys- 
tems could,  upon  the  then  existing  rates,  earn  over 
6%  on  their  property  investment,  and  consider 
what  has  occurred  since  in  higher  wages,  material 
costs  and  taxes,  with  nothing  like  corresponding 
increases  in  rates.  / 

The  Railroads  in  1900  had  outstanding  $200,- 
000,000.  more  stock  than  debt,  now  they  have  over 
Two  and  a Quarter  Billions  more  debt  than  cap- 
ital stock.  Instead  of  relieving  this  critical  credit 
condition  by  adequate  returns,  they  receive  homi- 
lies on  expected  future  economies  and  increased 
business,  without  any  assurance  of  what  the 
future  will  be.  In  the  past  these  suggestions 
have  proven  to  be  delusions,  and  the  railroads 


(7) 


are  too  weak  to  exist  in  future  on  any  such 
slender  threads. 

They  are  also  constantly  accused  of  watered  cap- 
ital, and  a swollen  property  investment  account. 
This  delusion  has  not  yet  been  buried.  Have  we 
forgotten  the  past  with  its  many  millions  of  good 
and  poor  railroad  capital  wiped  out  through  re- 
organizations, or  failure  to  earn  dividends  or  in- 
terest, or  the  millions  spent  by  solvent  roads  prior 
to  1907  out  of  surplus  without  any  legal  compul- 
sion, for  which  not  a dollar  of  securities  were 
issued?  Look  at  the  Pennsylvania  System  with 
over  five  hundred  million  dollars  of  property  and 
assets  in  excess  of  its  capitalization.  That  is 
the  result  of  75  years  of  prudent  financing. 
Can  there  be  any  doubt  today  that  the  real  prop- 
erty investment  for  all  the  railroads  exceeds  their 
original  cost  or  their  capitalized  cost,  and  that 
the  property  investment  as  stated  is  materially 
below  its  present  actual  value?  I have  none,  but 
if  I had,  I can  tell  you  that  the  question  of  wat- 
ered securities  or  swollen  values  has  been  further 
corrected  by  four  substantial  factors: 

1.  On  December  31st,  1917,  the  par  value  of 
the  Outstanding  Capital  Stock  and  Funded 
Debt  of  all  the  railroads,  said  to  contain 
billions  of  water,  was  $21,249,357,241.  Against 
that  capitalization  their  gross  investment,  includ- 
ing road  and  equipment,  miscellaneous  phys- 

(8; 


ical  property,  investments  in  affiliated  companies, 
and  other  general  investments,  aggregated,  as 
shown  in  the  Interstate  Commerce  Commission 
Eeport  for  1917,  $24,281,550,363.,  so  that  their 
total  investment  was  $3,032,193,122.  in  excess  of 
their  total  capital  issues. 

The  companies  also  had  a large  amount  in  cash 
and  materials  and  supplies  as  working  capital  in 
excess  of  their  current  liabilities,  but  for  the  pres- 
ent I have  omitted  this  for  good  measure,  so  that 
I might  be  sure  not  to  overstate  the  case,  which 
is  that  the  railroad  property  investment  exceeds 
by  at  least  Three  Billion  Dollars  the  outstanding 
railroad  capital  held  by  the  public,  and  by  the 
railroads. 

The  railroad  companies  themselves  acquired 
and  held  $4,847,571,224.  of  that  outstanding  cap- 
ital, and  the  balance,  $16,401,786,017.,  was  held 
by  the  public. 

2.  Let  us  look  further  at  the  question  of  cap- 
italization from  the  income  standpoint,  and  ask 
is  the  public  fully  supporting  it.  There  we  see 
that  over  36%  of  the  total  outstanding  capital 
stock  of  all  the  railroads,  or  $3,250,000,000.,  does 
not  pay  dividends,  and  a very  large  part  of  that 
non-dividend  paying  stock  is  owned  by  the  public, 
and  an  examination  of  the  figures  will  show  that 
the  percentage  of  non-dividend  paying  stock  in- 
stead of  decreasing  has  been  increasing  in  the 

(9) 


last  ten  years.  Further  there  is  a large  amount 
of  funded  debt  not  paying  the  interest  due  thereon, 
but  I omit  it  so  as  to  state  my  case  conservatively. 
We  may,  therefore,  sum  up  the  situation  by  saying 
that  the  railroad  capital  account  is  protected  by 
over  $3,000,000,000.,  or  almost  15%  more  of  in- 
vestment, and  further  the  railroad  income  pro- 
vided by  the  public  on  the  other  hand,  has  paid 
no  dividends  on  $3,250,000,000.  of  capital  stock 
held  in  part  by  the  railroad  companies  and  in 
part  by  the  public,  nor  interest  on  many  millions 
of  funded  debt  similarly  held. 

3.  Let  us  now  estimate  whether  the  railroad 
property  investment  itself  represents  real  value 
taken  as  a whole. 

The  whole  railroad  investment  account,  in- 
cluding road,  equipment,  and  other  investments  on 
December  31st,  1917,  was  $24,281,000,000.,  and 
railroad  capital  about  $21,249,000,000.,  or  over 
three  billion  dollars  in  favor  of  total  investment 
as  against  outstanding  capital.  But  let  us  ex- 
clude all  investments  except  that  in  road  and 
equipment,  which  is  $18,423,000,000.,  to  see  if 
it  will  stand  the  test  of  a rapid  estimation. 
Since  1907  the  property  account  has  been  kept 
under  the  classification  of  the  Interstate  Com- 
merce Commission,  and  in  fact  for  many  years 
before  that  the  State  and  Federal  Commissions 
could  have  required  the  information  essential  in 

(io) 


connection  with  any  feature  of  capital  issues  or 
investments. 

4.  It  is  clear  that  if  property  accounts  did  not 
represent  cost  it  must  have  been  prior  to  1907. 
Let  us  spend  a few  minutes  in  reasoning  out 
whether  any  such  condition  then  existed.  On 
June  30tli,  1907,  the  railroads  of  the  Country  had 
a total  track  mileage  of  327,975,  the  property  in- 
vestment account  represented  by  road  and  equip- 
ment was  approximately  $13,030,000,000.,  or  an 
average  per  mile  for  track  and  equipment  of  about 
$39,730.  That  amount  also  included  terminals, 
stations,  yards,  land,  55,388  locomotives,  1,991,557 
freight  cars,  and  43,973  passenger  cars.  That  is 
the  lowest  construction  cost  in  the  World,  and  con- 
sidering our  higher  rates  of  pay  compared  with 
other  civilized  countries,  is  of  itself  a quick  an- 
swer to  the  questions  of  both  an  overstated  prop- 
erty investment  account  and  watered  capital. 
But  beyond  that  we  know  that  $39,730.  a mile  of 
track  would  not  take  us  very  far  in  the  present 
day  costs.  A mile  of  track  requires  right  of  way, 
grading,  track,  switches,  signals,  bridges,  etc.,  but 
when  we  also  consider  that  the  $39,730.  per  mile 
includes  as  well  the  cost  of  all  of  the  big  terminals, 
station  and  yard  structures,  locomotives,  freight 
cars,  and  passenger  cars,  then  existing,  we  have  a 
further  assurance  that  now  instead  of  the  prop- 
erty investment  being  overstated  as  some  have 

(n) 


told  us  by  eight  billions,  the  facts  are  that  it  is 
now  understated  by  that  amount. 

That  average  of  $39,730.  per  track  mile — which 
includes  all  the  above  factors  and  equipment — if 
spent  for  equipment  alone  would  today  pur- 
chase about  one-half  of  a modern  locomotive,  or 
about  a dozen  freight  cars. 

We  also  know  that  there  are  large  portions  of 
roads  and  terminals  constructed  in  and  through 
large  cities  and  on  strategic  locations  in  moun- 
tains and  valleys,  and  having  special  originating 
traffic  sources,  that  could  not  be  reproduced  for 
many  times  their  original  cost.  The  whole  situa- 
tion could  be  driven  home  with  even  greater  force 
by  applying  reproduction  costs  to  the  transporta- 
tion system  and  its  equipment  as  a whole,  and 
under  any  equitable  valuation  plan  that  is  certain 
to  be  the  result.  The  question  of  watered  capital, 
or  of  alleged  overstated  property  investment  ac- 
count, therefore  as  a whole,  forms  no  part  of  the 
rate  problem,  and  if  it  did  nothing  has  been  al- 
lowed to  support  it  in  railroad  rates  or  returns. 

In  the  meantime  it  is  well  to  point  out  that  the 
railroads  of  the  Country  show  a remarkable  ad- 
vance in  efficiency  by  the  growth  of  the  train  load, 
the  car  load,  and  in  public  service  generally,  but 
their  owners  who  furnished  the  money  have  never 
been  allowed  to  participate  sufficiently  in  the  pros- 
perity of  the  Country  at  large,  of  which  they  are 
one  of  the  chief  instruments. 

(12) 


The  failure  for  a very  long  period  to  allow  rates 
adequate  to  support  the  transportation  system,  is 
now  being  followed  by  a suggestion  to  patch  up 
the  present  condition  by  suggesting  the  sacrifice  of 
the  conservatively  managed  roads  for  the  benefit 
of  the  so-called  weak  lines.  That  we  should  not 
consider,  unless  the  amount  and  value  of  the  trans- 
portation service  the  weak  lines  render  for  the 
public  justifies  it,  and  their  own  financing  has  first 
been  subjected  to  the  keenest  scrutiny.  It  is  not 
from  high  rates  that  weak  roads  have  grown 
strong,  but  from  generations  of  conservative 
financing  by  which  their  stockholders  sacrificed 
themselves  in  paying  premiums  for  their  stock, 
in  foregoing  larger  dividends,  and  in  allowing 
their  managements  to  defer  proper  dividends,  or 
to  put  back  into  their  properties,  without  any 
public  compulsion,  earnings  from  both  transpor- 
tation and  long-time  investments,  that  might  leg- 
ally and  morally  have  been  paid  to  their  owners. 
I do  not  see  any  miracle  which  will  change  that 
procedure  in  the  future.  There  is,  however, 
the  necessity  of  changing  the  entirely  inadequate 
rates  and  returns  that  have  been  allowed  the  rail- 
roads as  a whole,  including  these  weak  lines,  and 
in  that  readjustment  the  latter  will  have  their 
honest  share. 

I cannot  endorse  the  view  that  to  deal  ade- 
quately with  the  railroads  in  the  matter  of  rates, 
will  further  increase  the  cost  of  living,  or  be  an 

(13) 


excuse  for  profiteering.  Compared  w^tli  the 
value  of  the  article  transported  and  the  total 
profit  earned  on  such  products,  transporta- 
tion costs  have  been  very  low,  and  any  adjust- 
ment essential  to  bring  the  railroads  to  a proper 
self-sustaining  condition,  and  take  them  from  the 
backs  of  the  taxpayers  and  the  public  Treasury  will 
be  equitable  to  the  entire  Country.  The  increase 
necessary  to  do  so  will  be  very  small,  compared 
to  the  rate  increase  that  must  be  made  on  the 
railroads  of  any  other  Nation  with  which  this 
Country  competes  in  its  trade  and  commerce. 
I am  a firm  believer  in  the  fact  that  with 
better  facilities,  we  can  do  an  increased  busi- 
ness and  secure  increased  production  and  effi- 
ciency, and  this  is  better  for  the  Country  as  a 
whole  than  congested  traffic,  decreased  output, 
and  lower  wages,  and  the  total  stoppage  of 
new  railroad  mileage  in  our  Country  which  is  yet 
far  from  final  development.  Working  and  saving 
mean  prosperity,  but  the  railroads  can  never  work 
efficiently  nor  at  the  lowest  costs  with  a deficient 
plant,  deficient  revenues,  nor  insure  the  continued 
development  of  our  vast  mineral  and  manufactur- 
ing resources. 

Surely  this  is  not  an  unreasonable  plan,  par- 
ticularly in  this  Country  where  rates  are  still 
lower  and  wages  higher  than  any  other  civilized 
Country,  and  where  the  public— with  the  few  ex- 
ceptional and  chronic  dissenters — is  generally 

(14) 


ready  to  pay  reasonable  and  adequate  rates  in 
order  to  secure,  under  reasonable  regulation, 
transportation  facilities  when  and  as  needed  to 
meet  the  traffic  of  the  Country,  which  in  the  past 
has  doubled  about  every  twelve  or  fifteen  years. 

It  was  to  meet  this  condition  and  give  regulation 
a broadened  power  and  increased  responsibility 
that  the  Association  of  Railway  Executives  in  its 
recommendations  to  Congress  proposed  a Secre- 
tary of  Transportation,  or  a Transportation 
Board,  to  study  and  keep  Congress  and  the  Coun- 
try constantly  advised  of  the  transportation  con- 
ditions and  necessities,  and  to  certify  its  conclu- 
sions to  the  Interstate  Commerce  Commission.  I 
will  not  dwell  on  the  other  suggestions  of  the  Rail- 
way Executives  for  conservative  Congressional 
action,  looking  to  re-establishing  the  credit  of  the 
railroads  by  making  Federal  authority  responsi- 
ble for  adequate  returns  from  all  rates,  interstate 
and  intrastate;  suggesting  a comprehensive  rule 
for  rate  making;  asking  authority  under  proper 
approval  to  absorb  or  merge  into  the  larger  sys- 
tems connecting  lines  and  feeders,  which  collect- 
ively means  about  1500  leased,  owned  and  op- 
erated companies;  also  Federal  approval  of  all 
securities  before  issue,  and  certification  of  the 
public  need  for  all  but  nominal  capital  expen- 
ditures before  they  are  made.  You  will  under- 
stand on  any  large  scheme  of  extended  regula- 
tion how  important  it  is  to  have  well  quali- 

(15) 


fied  and  experienced  Transportation  and  Inter- 
state Commerce  Commissioners,  amplified  for 
local  questions  by  State  Commissioners,  with  long- 
term of  office  and  good  pay,  who  will  be 
able  to  give  broad,  just  and  prompt  decisions  in 
all  these  matters  involving  transportation  needs 
and  financial  requirements.  With  all  these  pow- 
ers the  life  and  death  of  the  railroads  rests  almost 
exclusively  in  their  hands,  they  can  make  those 
decisions,  or  they  can  through  unwise  regulation 
or  failure  to  regulate,  paralyze  them  and  crush 
out  private  initiative,  and  stop  all  broad  meas- 
ures to  provide  for  their  future. 

Almost  all  of  the  large  Cities  on  our  lines  are 
suffering  from  the  lack  of  transportation  facili- 
ties. The  roads  in  the  Eastern  District  have 
practically  become  the  terminals  of  the  railroad 
systems  of  the  Country  as  well  as  the  great  centers 
of  its  population  and  business.  All  of  this  has 
added  to  the  responsibility  of  railroad  managers, 
and  emphasizes  the  necessity  for  earning  reason- 
able returns.  It  is  so  easy  to  promise  and  not  be 
able  to  perform,  to  avoid  disagreeable  decisions 
instead  of  flatly  saying  “No”  for  fear  of  opening 
up  a flood  of  public  criticism.  IIow  is  it  possible 
to  definitely  commit  the  railroads  to  any  extraor- 
dinary capital  expenditures  not  already  under- 
way, when  so  many  of  them  are  not  earning  fixed 
charges,  and  nearly  all  of  them  have  heavy  debts 

due  the  Government?  Unless  the  truth  is  told 

06) 


plainly,  liow  is  the  public  to  appreciate  the  true 
situation?  Years  ago  we  bought  cars  for  $1000. 
each  and  paid  414%  interest;  now  we  have  bought 
cars  with  the  aid  of  the  Government  costing  about 
$3,000.  each  at  6%,  so  that  the  interest  rate  has 
risen  about  33  1-3%  and  price  200%,  or  both  to- 
gether means  a 300%  increase  in  the  annual  inter- 
est charges  alone,  to  give  service  to  the  public. 
Nevertheless,  the  Pennsylvania  System  will  do  its 
full  duty  to  the  extent  of  its  financial  resources, 
and  has  agreed  to  accept  over  fifty  million  dollars 
worth  of  new  equipment  from  the  United  States 
Railroad  Administration,  to  be  paid  for  in  some 
way  that  will  be  satisfactory  to  both  parties. 
It  is,  therefore,  very  essential  that  your  City 
impress  your  representatives  in  the  State  and 
National  legislatures  with  the  necessity  for 
returning  these  railroads  to  their  owners  in 
such  physical  and  financial  condition  that 
they  will  be  a benefit  and  not  an  obstacle 
to  future  National  progress,  and  have  proper 
funding  provisions  made  by  the  Government 
as  will  enable  the  railroads  to  gradually  repay 
their  debts.  A definite  rate  policy  would 
do  much  to  stabilize  business.  If  the  new  legis- 
lation is  unduly  restrictive  of  private  initiative 
and  fair  competition,  and  overlooks  the  important 
feature  of  sound  railroad  credit  and  expansion, 
the  work  of  Congress  is  wasted.  It  is  useless  to 
offer  political  compromises  or  fair  words  and 

(17) 


more  extensive  regulation  in  a period  of  National 
reconstruction,  when  higher  rates  and  better 
credit  is  imperative.  Nothing  but  a straightfor- 
ward business-like  basis  for  dealing  with  the  rail- 
roads will  be  protective  of  the  public  interest.  We 
stand  upon  the  threshliold  of  losing  the  advantages 
on  the  one  hand  of  private  initiative  and  owner- 
ship of  the  railroads  by  our  citizens,  and  on  the 
other  hand  of  abolishing  the  extensive  system  of 
National  and  State  regulation  built  up  in  long- 
years  and  at  great  expense.  If  following  the  re- 
lease of  the  railroads  from  Federal  Control,  pub- 
lic regulation  cannot  allow  railroad  credit  and  ex- 
pansion to  progress,  it  will  incur  the  verdict  of 
gradually  but  surely  ruining  the  railroads,  and  of 
wasting  millions  of  money  annually  in  the  collec- 
tion of  information,  and  for  making  decisions 
and  reports,  which  in  practice  proved  use- 
less in  regulating  constructively  the  transpor- 
tation systems  of  the  Country  to  serve  it 
properly.  This  must  mean  that  the  Country  will 
clean  the  slate  and  begin  all  over  again,  or  go 
straight  to  Government  ownership  where  the 
higher  costs  and  political  disadvantages  can  be 
concealed  through  appropriations,  and  the  public 
will  be  unable  to  protect  itself  against  a system 
from  which  individuality  and  responsibility  will 
be  eliminated  or  passed  along  from  one  Admin- 
istration to  another.  All  can  be  avoided  by 
prompt  action  that  will  eliminate  the  railroad 

(18) 


problem  from  the  political  arena  and  let  hard 
work,  experienced  direction  and  broad-minded 
regulation  cure  it  for  the  Country’s  benefit.  De- 
lay and  fettering  legislation  means  our  paralysis ; 
broadminded  legislation,  requiring  equitable  regu- 
lation means  prosperity  retained  and  extended  in 
1920. 

As  I regard  the  situation,  I can  see  that  the 
taxation  bodies  have  protected  themselves  by  large 
increases,  that  labor  has  insisted  upon  and  re- 
ceived its  share,  and  that  higher  prices  for 
materials  of  all  kinds  have  had  to  be  met  by 
the  railroads,  during  Government  control,  but 
without  a corresponding  adjustment  of  rates  to 
that  higher  basis  of  cost,  nor  their  returns  to  a 
common-sense  basis  of  attracting  new  capital  into 
the  business,  which  must  be  attracted  from  the 
investors  and  cannot  be  commandeered.  It  is 
imperatively  necessary  that  these  adjustments  be 
made  if  we  are  to  restore  the  credit  of  the  rail- 
roads and  again  have  progressive,  efficient,  grow- 
ing systems  of  transportation,  equal  to  the  needs 
of  our  advancing  commerce,  industry  and  agri- 
culture. 

Now  a few  words  on  your  local  situation.  I 
regard  it  as  a rare  privilege  at  this  critical 
time  in  affairs  of  the  railroads  to  have  the  op- 
portunity of  speaking  to  a representative  audience 
of  this  great  commercial  City,  which  has  shown 
in  recent  years  unparalleled  growth.  A popula- 

(19) 


tion  that  has  grown  within  20  years  from  less 
than  300,000  to  about  1,200,000  persons,  area  from 
28  to  75  square  miles,  and  value  of  manufactured 
products  from  88  millions  to  probably  800  million 
dollars  needs  no  demonstration  of  the  necessity 
for  increased  railroad  facilities  to  properly  ac- 
commodate its  incoming  fuel  and  raw  materials 
and  its  outgoing  finished  products,  and  a large 
general  merchandise  and  passenger  traffic  as  well. 

The  rapid  growth  of  Detroit  requires  con- 
stantly expanding  railroad  facilities,  and  the  fact 
that  the  Pennsylvania  System,  with  its  extensive 
originating  and  distributing  territory,  was  only 
$ixty  miles  away,  and  had  outgrown  many  years 
ago  the  arrangements  whereby  its  traffic  reached 
your  City,  with  your  repeated  invitations  and 
criticisms  awakened  us  to  the  necessity  of  ex- 
tending to  your  City  to  help  in  meeting  the  de- 
mand for  transportation  facilities. 

The  Pennsylvania  System,  with  which  you  have 
for  so  many  years  demanded  that  your  City  be 
brought  into  direct  connection,  is  one  of  the  large 
railroad  systems  of  the  Country.  Its  investment 
in  railroad  and  equipment  aggregate  about  $1,800,- 
000,000.,  or  roughly  about  one-tenth  of  the  whole 
railroad  and  equipment  investment  of  the  Country, 
and  with  its  other  investments  it  represents  over 
$2,000,000,000.  Its  ton  mileage — the  important 
freight  traffic  statistic — is  over  12%  of  the 

total  of  the  whole  Country,  and  its  passenger 

(20) 


mileage  14%,  making  it  the  largest  freight  and 
passenger  carrier  of  the  Country.  Its  lines  tra- 
verse about  thirteen  States,  from  the  Great  Lakes 
to  the  Potomac  River  and  Chesapeake  Bay,  and 
from  the  Mississippi  River  to  the  Atlantic  Ocean, 
and  they  handle  a large  import  and  export 
traffic.  Its  territory  contains  great  manufactur- 
ing and  mineral  resources,  as  well  as  a large 
consuming  population.  Especially  does  it  reach 
the  greater  part  of  the  States  of  Pennsylvania  and 
Ohio  and  chief  sources  of  coal,  iron,  steel  and 
other  products.  Detroit  must  necessarily  draw 
largely  from  those  resources  in  gathering  the 
raw  materials  for  its  numerous  industries.  On 
the  other  hand  Detroit  requires  adequate  facili- 
ties for  the  distribution  of  its  enormous  produc- 
tion not  only  throughout  the  State  of  Pennsyl- 
vania, but  New  England,  the  West,  the  South  and 
Southwest,  all  of  which  points  are  reached  through 
the  Pennsylvania  System. 

In  considering  the  extension  of  the  Pennsylva- 
nia System  from  Toledo  to  Detroit,  those  respon- 
sible for  the  same  were  mindful  of  the  fact  that 
they  should  utilize  existing  railroads  as  much  as 
possible  and  avoid  duplicating  capital  issues,  and 
railroad  facilities.  Therefore,  we  joined  with 
other  railroads  and  by  granting  reciprocal  rights 
to  them  on  our  lines,  and  not  only  using  their  run- 
ning tracks,  but  also  their  terminals  in  Detroit, 


(21) 


we  were  enabled  to  project  an  extension  from 
Toledo  into  Detroit  at  reasonable  expense. 

Our  Pennsylvania-Detroit  Railroad  will  have 
trackage  rights  over  the  Pere  Marquette  Railway 
from  the  Ohio-Michigan  State  Line  at  Toledo  to 
Carleton,  Michigan,  about  twenty-live  miles,  and 
has  acquired  a continuous  right  of  way  for  its 
road  from  the  latter  point  to  the  River  Rouge, 
Detroit,  about  twenty  miles,  as  well  as  running 
rights  and  a continuous  right  of  way  for  a belt 
line  from  that  point,  within  the  seven  mile  circle, 
northward  and  eastward  to  the  Ford  Motor  Com- 
pany plant  at  Highland  Park,  a distance  of  about 
twelve  miles,  and  on  the  east  side  of  the  City  has 
acquired  approximately  about  seventy  acres  of 
land.  The  line  from  Carleton  to  the  River  Rouge 
is  under  construction,  about  live  miles  of  grading 
having  been  partly  completed. 

To  provide  the  proper  yard  facilities  to  meet 
any  abnormal  development  in  the  down-river  sec- 
tion, a large  tract  of  land  was  acquired  on  the 
Detroit  River  in  River  Rouge  Village.  A further 
large  tract  of  land  was  acquired  for  the  main 
receiving,  classification  and  storage  yard  west  of 
the  River  Rouge,  on  which  the  masonry  work  is 
about  75%  complete  and  the  grading  25%.  This 
yard  will  have  a standing  capacity  for  13,000 
cars.  The  new  belt  line  around  the  City  was  nec- 
essary to  permit  of  a logical  and  elastic  industrial 
expansion,  and  a most  careful  investigation  was 

conducted  and  a line  selected  to  enable  concerns 

(22) 


to  immediately  take  advantage  of  well  located 
sites  close  to  street  car  and  other  facilities,  and 
at  very  reasonable  prices.  In  the  northern  sec- 
tion of  the  City,  near  Livernois  Avenue,  on  the 
belt  line,  a large  tract  of  land  was  acquired  for 
local  yard  purposes,  which 'will  be  developed  to  a 
capacity  of  about  1,000  cars.  Another  large  tract 
has  been  acquired  on  the  east  side  to  have  a capac- 
ity for  1,000  cars. 

The  belt  line  from  Warren  Avenue  to  Liver- 
nois Avenue  is  in  operation,  thereby  creating  in 
the  west  and  northwest  sections  one  of  the  most 
desirable  manufacturing  districts  in  the  Detroit 
metropolitan  territory.  Sites  along  the  Pennsyl- 
vania Railroad  in  the  westerly  part  of  Oakwood 
Village  and  along  its  main  belt  line,  from  Michi- 
gan Avenue  to  Highland  Park,  are  also  particu- 
larly well  located  for  industrial  development. 
Twenty  industries  have  acquired  by  purchase  a 
large  acreage,  in  addition  to  the  development  by 
the  Ford  Motor  Company  at  the  River  Rouge. 
Many  of  the  industries  are  constructing  plants 
and  others  will  undertake  building  when  condi- 
tions are  more  suitable.  It  was,  of  course,  ap- 
parent that  while  a belt  line  would  provide  for 
new  industries  coming  to  Detroit  and  the  exten- 
sion of  existing  plants,  it  would  not  relieve  indus- 
tries already  located  on  existing  railroads,  and 
in  order  to  provide  a maximum  of  service  at  the 
earliest  possible  date,  the  Pennsvlvania-Detroit 
Railroad  secured  running  rights  and  access  to  all 

(23) 


industries  located  along  the  Pere  Marquette  and 
Wabash  Railroads  within  the  metropolitan  dis- 
trict of  Detroit,  aggregating  about  nineteen  miles 
of  main  line  and  reaching  about  one  hundred  and 
eighteen  established  industries. 

For  Detroit  proper  a large  tract  was  acquired 
on  Fort  Street  West,  within  the  two  and  one-half 
mile  circle,  for  team  track  purposes.  This  will 
have  a capacity  of  about  three  hundred  cars  and 
is  within  easy  trucking  distance  of  the  business 
center.  For  a downtown  freight  house  and  addi- 
tional team  tracks,  land  was  acquired  on  Third 
Street  near  Fort  Street,  and  extending  westwardly 
to  Brooklyn  Street,  and  from  Congress  Street  to 
Larned  and  Jefferson  Avenues.  Here  it  is  pro- 
posed to  erect  a large  modern  inbound  and  out- 
bound freight  house,  with  storage  facilities  and 
team  tracks.  The  Pennsylvania-Detroit  Railroad 
has  also  acquired  the  joint  use  of  the  Fort  Street 
Union  Passenger  Station,  and  upon  completion  of 
the  new  line  passenger  trains  will  be  routed 
through  Toledo  in  such  a manner  as  to  avoid 
serious  and  annoying  delays  and  with  consider- 
able saving  of  time.  The  station  will  be  remod- 
eled and  enlarged  to  meet  the  requirements  of 
the  joint  users,  namely,  the  Pennsylvania,  Pere 
Marquette  and  Wabash  Railroads.  Property  at 
Nineteenth  Street  has  been  acquired  for  coach 
yard  and  engine  facilities,  for  use  in  connection 
with  this  station. 

This  work  was  under  construction  when  the 

(24) 


railroads  were  taken  over  by  the  Government, 
and  the  work  consequently  stopped  because  all  of 
our  capital  and  energies  had  to  be  directed 
towards  winning  the  War. 

The  Pennsylvania  System  has  expended  on  this 
extension  over  Seven  Million  Dollars,  and  in  view 
of  present  prices  for  labor  and  materials,  it  will 
require  the  expenditure  of  at  least  Eight  Millions 
additional.  We  are  prepared  to  proceed  with  it, 
and  push  it  to  completion,  just  as  soon  as  some 
proper  permanent  legislation  is  secured  that 
vill  assure  to  the  railroad  systems  of  the  Coun- 
ty a sound  credit  basis  for  the  raising  of  new 
!apital  to  expand  their  facilities.  We  appre- 
ciate the  interest  you  have  shown  in  urging 
the  extension  of  our  System  into  your  City, 
and  it  is  a matter  of  deep  regret  that  it  has 
been  deferred  so  long.  We  have,  however,  made 
arrangements  effective  shortly  after  the  return  of 
the  railroads  to  private  operation  to  inaugurate, 
by  a temporary  arrangement  through  the  courtesy 
of  our  connecting  lines,  with  whom  we  will  ulti- 
mately have  permanent  relations,  a freight  and 
passenger  service  with  our  own  trains,  which  will 
enable  the  Pennsylvania  to  directly  transact  busi- 
ness with  Detroit,  and  while,  of  course,  the  service 
will  be  more  or  less  limited  as  compared  with 
what  it  shall  ultimately  be  when  our  own  extension 
is  completed,  we  will  endeavor  to  make  it  as  con- 
venient and  accommodating  to  the  public  as  pos- 
sible under  the  circumstances. 

(25) 


